Investing

Net Unrealized Appreciation (NUA)

A tax strategy for moving appreciated employer stock out of a 401(k) so growth is taxed at capital-gains rates instead of as ordinary income.

If your 401(k) holds appreciated company stock, an NUA election lets you pay ordinary income only on the stock's cost basis when you move it to a taxable account, then capital-gains rates on the appreciation when you sell. For long-tenured employees with low-basis employer stock, the savings can be large — but the move is irreversible and rule-bound. It's a once-in-a-career decision worth modeling carefully.

Moving employer stock out at favorable rates

If your 401(k) holds appreciated stock in your employer, a net-unrealized-appreciation election lets you take that stock as a lump-sum distribution into a taxable brokerage account, paying ordinary income tax only on its original cost basis — not its current value. The appreciation (the NUA) is then taxed at long-term capital-gains rates when you eventually sell, instead of the higher ordinary rates that normally apply to 401(k) withdrawals.

Powerful, but rule-bound and irreversible

NUA can be a large win for long-tenured employees holding low-basis company stock, but the rules are exacting: it generally requires a qualifying triggering event and a lump-sum distribution of the whole plan within one tax year, and the company stock must move in-kind. Done wrong, you forfeit the treatment — and the choice can't be unwound. It's a once-in-a-career decision worth modeling before you pull the trigger.

How Formation handles it

Formation surfaces the cost basis of employer stock inside your retirement accounts, so the gap between basis and market value — the whole reason NUA matters — is visible while you and your CPA weigh the election. Formation tracks the inputs; the irreversible decision stays with your advisor.

A worked example

Your 401(k) holds $600,000 of company stock with a $90,000 cost basis. Roll it all to an IRA and every future dollar comes out as ordinary income. Use NUA instead and you pay ordinary tax on just the $90,000 basis now, with the $510,000 of appreciation taxed at long-term capital-gains rates when you sell — potentially a large rate difference.

Frequently asked

How does net unrealized appreciation work?

You distribute appreciated employer stock from your 401(k) in-kind to a taxable account, paying ordinary income tax only on the stock's cost basis. The appreciation is later taxed at long-term capital-gains rates when sold, rather than as ordinary income.

When does an NUA election make sense?

Typically when you hold low-basis employer stock with large appreciation and face a qualifying triggering event (like separation from service or reaching 59½). The bigger the gap between basis and market value, the more the capital-gains treatment can save — but the rules are strict and the move is permanent.

In Formation

Employer-stock concentration

See this in your own numbers.

Formation organizes your whole household by entity and cites every figure to its source — the context that makes terms like this actionable.

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